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CBO Estimates Social Security Account Costs

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If the federal government sets up an individual Social Security investment account system, officials may allocate less than $20 per account for annual administrative expenses.[@@]

The Congressional Budget Office has published that prediction in a letter to Sen. Max Baucus, D-Mont., the most senior Democrat on the Senate Finance Committee.

In the letter, CBO Director Douglas Holtz-Eakin looks at some of the assumptions in H.R. 3304, a bill introduced in July that would create individual Social Security accounts called “Growing Real Ownership for Workers accounts.”

One of the issues Holtz-Eakin addresses is administrative costs.

Baucus and other critics of the individual Social Security account concept say administrative costs would be high, especially while the GROW system was being set up.

CBO researchers found in 2004 that running a private defined contribution retirement plan costs an average of $24 to $103 per account per year.

The authors of H.R. 3304 would require that the GROW system governing board hold annual administrative expenses to 0.3% of assets.

But early on, in 2007, the average account might hold only $700, and 0.3% of assets would be only about $2 per account, Holtz-Eakin writes in the letter to Baucus.

“In key respects it costs about as much to manage a small account as it does a large one,” Holtz-Eakin writes.

H.R. 3304 would try to hold early costs down by requiring that all invested assets be held in Treasury securities until 2009, Holtz-Eakin writes.

During the early years, the CBO estimates administration costs would average just $7 to $8 per account per year.

“After that, owners would pick from a limited menu and could reallocate funds once a year,” Holtz-Eakin writes. “Credits would be posted just once a year.”

The Federal Thrift Savings Plan, the model for the GROW program, credits federal employees’ savings plan accounts every 2 weeks, Holtz-Eakin writes.

But, even though the GROW accounts would provide fewer account value updates than the Thrift Savings Plan accounts, administrative costs for GROW accounts would likely be higher than 0.3% of assets, Holtz-Eakin writes.

The Social Security Administration has implied that costs per account would fall in the $5 to $19 range for a “no-frills, high-service” plan, Holtz-Eakin writes.